Macroeconomic shocks and fiscal deficit behaviour in Nigeria: a VECM approach.

Abstract

This paper focuses on establishing the links between fiscal deficit and short-term changes in major macroeconomic variables like real output, interest rate, exchange rate, inflation rate and crude oil price in Nigeria. Empirical results show that the model adequately explains the behaviour of government of fiscal deficit and that while the accumulation of deficit is not at all detrimental to the economy per se, prudence should be exercised in the financing options adopted and more so the appropriate application of such funds to selffinancing projects. It is recommended that government broaden its tax-net to curb the surging borrowing as well as prevent the current fiscal challenges from cascading into a full scale fiscal crisis. Finally, budget making should not be assumed to a mere accounting exercise only, instead the process should be focused on developing both physical and human capital through a carefully thought out socio-economic development framework.